Development: Pitfalls of agricultural tenancies

Development: Pitfalls of agricultural tenancies

A longer version of this article was published recently in the Estates Gazette. It highlights some of the obstacles facing a landowner who is trying to develop part (or even the whole) of a farm let by him.

The Planning Dimension

Whether the agricultural tenancy is governed by the Agricultural Holdings Act 1986 or the Agricultural Tenancies Act 1995 (“1995 Act”), the landowner’s first concern is to achieve planning. As to that, the tenant is (in the absence of an agreement to give up tenanted rights) likely to oppose the planning application.

Are the Tenant’s personal circumstances a material consideration in planning?

The starting point is whether the personal circumstances of a tenant can be a “material consideration” for the purpose of the determination of a planning application. The House of Lords decided what is a material consideration in Great Portland Estates v Westminster City Council [1985]. In that case, Lord Scarman said that when considering the position of a tenant in relation to planning application, the principle of law is well settled, emanating from the earlier decision of Lord Parker CJ in East Barnett Urban District Council v British Transport Commission [1962].

What Lord Parker decided was that, when considering whether there has been a change of use “what is really to be considered is the character of the use of the land, not the particular purpose of a particular occupier”. The test is, therefore, what is a material consideration in the preparation of plans or the control of development. However, Lord Scarman went on to consider whether the personal circumstances of an occupier might be taken into account. What he said was: “personal circumstances of an occupier, personal hardship, the difficulties of businesses which are of value to the character of a community are not to be ignored in the administration of planning control”.

The case of Welsh Ministers v Davies [2013] is an example of where the Court of Appeal, reversing the decision of the High Court, determined that the agricultural tenant’s personal circumstances were rightly given little weight by the Planning Inspector in that case.

Planning Requirements

Over the years planning has become increasingly complicated. Its sophistication has resulted in numerous conditions often being applied even to relatively modest developments. Conditions will often include environmental obligations and the like. Sometimes it is necessary for the landowner to be able to achieve access onto the tenanted farm in order to fulfil planning conditions.

The recent decision of the High Court in Windsor-Clive v Rees illustrates the difficulty for a landowner. In that case the Court refused to grant an injunction to allow the Landlords the access that they sought. An exception or reservation would, if possible, be construed so as to preserve its validity. The Court would, where possible, construe an exception or reservation as restrictively as was required to avoid derogation from grant or a conflict with the covenant for quiet enjoyment.

Tenancies governed by Agricultural Holdings Act 1986

  1. Notice to quit part

Usually the landowner only wants to develop part of the let farm. The first issue is, therefore, whether a notice to quit part can be given. At common law it cannot. However, the landowner’s first port of call is whether the tenancy agreement contains an express provision which allows him to give notice to quit part.  Such a provision is permitted by Section 25 (2) (b) of the 1986 Act where the landlord seeks to recover possession for a non-agricultural purpose.

  1. Section 31

Where there is no contractual provision, Section 31 of the 1986 Act allows a landlord to give notice to quit part for the reasons specified in that Section. They are the so-called “public utility” grounds, covering things such as the provision of allotments; opening up workings for coal, etc.; and making a reservoir or a road or railway. The list, which has its provenance in the Agricultural Holdings (England) Act 1875, does include the planting of trees, but generally Section 31 is of limited use to a landowner.

  1. Severance

In those circumstances, a landowner will fall back upon the third option which is the severance of the freehold reversion. There is court authority (albeit from the period when public policy in agricultural matters was paramount) indicating the courts will look at the substance of the transaction in order to ensure that it is genuine. The transfer to agents of part of the title, to be held as bare trustees, was successfully challenged in the Court of Appeal in Persey v Bazley (1983). However, this does not mean that every severance of the freehold by transfer between connected parties is capable of challenge: see, for example, John v George [1995].  In the absence of an effective contractual provision in a tenancy agreement, severance is widely used to enable the landowner to give notice to quit in relation to part of a holding.

  1. Surrender

The issues which then may arise where a landlord gives a notice to quit in reliance upon Case B (where planning permission has been obtained) or Section 27 (3) (f) of the 1986 Act (where the non-agricultural use does not require planning permission) is beyond the scope of this article. However, there are more pitfalls there. That helps explain why in so many cases a landowner will seek to reach an agreement with the tenant so that a surrender is achieved.

Even that is not without its issues under the 1986 Act.  An agreement to surrender at a future date brings its own problems. The Court of Appeal decided in Elsden v Pick [1980], that an agreement to surrender before the date upon which notice to quit could take effect is enforceable and does not involve contracting out of security of tenure. However, there is no case authority as to the question of whether an agreement to surrender at a future date is enforceable. What is clear is that an agreement to surrender at a future date, as a condition of the grant of a tenancy, will almost certainly be unenforceable: see Johnson v Moreton [1980] and Featherstone v Staples [1986].

  1. Section 27(3)(f)

This section did not appear in the EG Article.  Above I refer to Section 27(3)(f) as providing the alternative to Case B where development for non-agricultural use does not require planning permission. In the case of Herefordshire District Council v Bayliss (6 September 2019), the First-tier Tribunal had to consider the position where the applicant had applied for planning permission for residential development, including in respect of the subject holding, but the planning permission had not been granted.  While the outcome of the planning application was awaited, the applicant applied to the Tribunal for consent to the operation of a notice to quit in reliance on Section 27(3)(f).  Quite rightly, the FTT rejected the application, deciding that Section 27(3)(f) is not available to a landlord in any case where the intended non-agricultural use requires the grant of planning permission.

Agricultural Tenancies Act 1995 (Farm Business Tenancies)

Enter the 1995 Act and the underlying concept of freedom of contract. However, this is also not without its difficulties.  For example, how often does one see a farm business tenancy (“FBT”) which is being granted for a period of more than 2 years containing a break clause to allow development on short notice?  It does not work.

  1. The Law

The statutory framework relating to the termination of a FBT is contained in Sections 5 and 7 of the 1995 Act. Section 5 interferes with the common law position in relation to FBTs for a fixed term of more than 2 years by providing that:

  1. such a tenancy will not automatically terminate by effluxion of time on its term date, and
  2. if a landlord and tenant want to end the tenancy on the term date, one must take positive action to do so by serving a written notice on the other of his intention to terminate the tenancy on that date; and
  3. the notice must be served at least 12 months before the term date.
  1. Break clauses

As regards break clauses, Section 7 overrides and supplements the agreement between the parties in respect of a FBT of more than two years duration. Section 7 provides that any notice to quit in respect of the whole or part of a holding served pursuant to a term of the tenancy, i.e. a break clause, will be invalid unless:

  1. it is in writing and
  2. it is given at least 12 months before the date on which it is to take effect.

Section 7 applies “notwithstanding any provision to the contrary in the tenancy agreement”.

The effect of this is that a short notice of less than 12 months will be ineffective where the FBT is for more than 2 years. Also, there is another unanswered question. Although Section 5 of the 1995 Act refers to termination on the term date, Section 7 is silent. It raises the question as to whether the common law applies, namely that any 12 month notice must expire on the term date. There is no case authority dealing with that.

So what should a landowner do where he wants to grant a longer term FBT to the tenant but part of the land may be required for development on short notice? The answer is to identify the land in respect of which the short notice may be required and to grant a separate FBT in relation to that land of a duration of two years or less.